More face sack at Goldman Sachs

Goldman Sachs, bracing for what could be one of its worst quarters since it went public 12 years ago, is preparing to expand its cost-cutting initiative by hundreds of millions of dollars, a move that could lead to additional job losses at the Wall Street bank.

This northern summer, Goldman said it would wring out $1.2 billion in costs from its operations by mid-2012 and cut roughly 1000 jobs, about 3 per cent of its workforce. But as the market turmoil has weighed on trading and other businesses in recent weeks, senior executives have been debating even deeper reductions, say people briefed on the matter who were not authorised to speak publicly.

With the company’s third quarter closing on Friday, Goldman has been revising its plans, potentially raising the cuts by as much as $250 million, to $1.45 billion. Based on its 2010 spending, such reductions would amount to 5 per cent of the firm’s expenses.

Along with the possibility of more layoffs, the firm is expected to cut employee pay, much of which is handed out later in the year. It is also sharpening its focus on noncompensation expenses, like real estate and travel, says one of the executives with knowledge of the discussions.

The executive warned that no final decision had been made on size of the cuts, and that the numbers could change quickly if the market improved or weakened. The financial firm may address the matter when it releases its earnings on October 18, he says.

Goldman’s move underscores the broader problems on Wall Street. Financial firms have been under pressure for months, amid the European debt crisis and an economic slowdown in the United States, and a raft of regulatory changes is expected to crimp future profits. But the financial situation has deteriorated in recent weeks, as the market rout has ravaged revenue across Wall Street.

With the stock market slumping, analysts are quickly revising their estimates for third quarter earnings, which the banks are set to report in mid-October. Analysts are tempering their predictions for JPMorgan Chase, Morgan Stanley, Citigroup, Bank of America and others.

Goldman is now expected to earn $1.35 a share in the third quarter, less than half what the firm earned in the same period of 2010, say consensus estimates from Thomson Reuters. A month ago, analysts predicted the bank would make $2.65 a share.

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The financial picture could be even more bleak, as analysts at both Barclays Capital and Bank of America Merrill Lynch have predicted a loss for Goldman. The company has reported a quarterly loss only once since going public in 1999; it lost $2.12 billion in the fourth quarter of 2008, months after Lehman Brothers filed for bankruptcy.

“This is an extremely challenging environment, and I am sure every bank will be taking another hard look at expenses after the recent market downturn," said Glenn Schorr, an analyst at Japanese bank Nomura.

In anticipation of a slowdown, banks began trimming their budgets earlier this year and took aim at the biggest expense: compensation. Bank of America, which continues to have losses from the mortgage crisis, has had some of the most severe cuts. It has announced that it would eliminate 30,000 jobs, nearly 10 per cent of its total work force, over the next few years. Overall, the bank is looking to cut $5 billion in annual expenses.

JPMorgan Chase is in the midst of a five-year, $1.3 billion cost-cutting plan that will eliminate roughly 3000 jobs. Morgan Stanley cut some low-producing brokers in its wealth management division, and Credit Suisse laid off administrative assistants in its investment banking unit last week as part of a larger reduction of 2000 employees.

Wall Street executives are also preparing their staffs for smaller year-end bonuses, although the change is not yet reflected in the expenses. During the first six months of the year Citigroup, JPMorgan, Goldman, Morgan Stanley and Bank of America set aside $65.69 billion to cover compensation and benefits, up 8 per cent from a year ago, says data provided by Nomura. But financial firms tend to wait until the fourth quarter to make the call on the annual payouts.

“The third quarter was rough and revenue is sure to be down, so compensation levels will follow," says Mr Schorr.

As Wall Street looks to drive down costs in a bid to protect profits, no expense has been overlooked. Goldman Sachs recently downsized the drinking cups in its New York headquarters to 10 ounces from 12 ounces, saving thousands of dollars. It has also gone mostly cashless in the cafeteria and other areas, eliminating the need to pay armoured truck companies to haul away the money.

Barclays, which has said it plans to cut 3000 jobs this year, recently issued a memo reminding employees that work-issued cellphones are to be used “for valid business purposes only". As well as closing two-thirds of its 63 data centres, Bank of America did not host an annual field day for its municipal bond department, a country club affair in New Jersey that in past years included sport stations outfitted with beer kegs.

Even foliage is not safe from the chopping block. James Gorman, the chief executive of Morgan Stanley, faced questions about plants at a town hall meeting this summer. An employee told Mr Gorman that he had noticed decidedly less greenery around the office.

“Every dollar we don’t spend is a dollar available for the bottom line," Mr Gorman responded.